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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Introduction to Fundamental Analysis Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions

Introduction to Fundamental Analysis

 - The Accounting Process
 - Postulates and Principles
    of Accounting
    * Postulates of Accounting
     * Principles of Accounting

The Financial Statements
   * The Balance Sheet
* The Income Statement
    * The Cash Flow Statement
    *  Shareholders' Equity



Shareholders Equity Statement

The statement of shareholders’ equity includes:

1)      The capital invested in a company.

2)      Retained earnings, which are the earnings or (losses) that have not been distributed to the shareholders via dividends.  

3)      Comprehensive income items.  

The statement rolls forward the components of shareholders’ equity from one year to the next, and discloses all changes during the period. Adjustments to the income statement or the balance sheet can affect shareholders’ equity.  If, for example, assets are overstated, the offset is ultimately equity. (The overstated assets get written down (expensed), which then flows into retained earnings, a component of shareholders’ equity.)

Investors need to be cautious if the ownership of their company is being diluted in terms of dollars, as well as shares outstanding.  Comprehensive income items are mostly non-owner charges to shareholders’ equity. These are mostly expenses, such as pension catch-up adjustments, that the rule makers determined should be charged directly to shareholders’ equity, and not the income statement.  Executive and employee stock options also dilute equity. Look for and be careful of a disconnect (divergence) between the earnings of a company and its net worth. If equity is being diluted, over time it will erode the stock price.

Medtronic, Inc.
Summary of Shareholders’ Equity
($ in millions)        

Fiscal Yr.

Fiscal Yr.

Common Stock

$ 121.0

$ 120.9




Retained Earnings – Beginning Balance



Add: Net income



Less: Dividends



Less: Stock repurchases



Add: C/s issued for employee stock plans



Add: Tax benefits on employee stock opt.



Add: C/s issued for acquisition



Retained Earnings – Ending Balance






Other non-owner charges in equity






Employee stock ownership plan rec.






Total Shareholders’ Equity

$ 10,449.5


$ 9,077.0







Payout Ratio:



Net Income

$ 1,803.9

$ 1,959.3

Payment to shareholders:






Stock repurchases



Total payments to shareholders



Payout Ratio



The distinction between dividends and stock buybacks is that dividends are distributed among all the common share owners, and are more permanent and recurring in nature, making it harder for management to reduce them. Stock buybacks, in contrast, are considered one time payments to shareholders, leaving management in control of future cash flows. Technically, buybacks increase the value of the remaining shares.




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